What does sterling drop mean for US expats from a tax perspective?

Investment opportunity

clock • 6 min read

A year on from the Brexit vote, Ephraim Moss and Joshua Ashman, co-founders of Expat Tax Professionals LLC, consider the opportunities for US expats who have investments treated as passive foreign investment companies (PFICs).

One of the major economic fallouts of last year's Brexit referendum was the sudden and significant depreciation of the British pound. 

More recently, the pound fell sharply again following the results of the UK election, which show the Conservative party currently in power failed to reach a majority in the British Parliament.

The FATCA factor: Five key tax considerations for US expats

What does this mean from a tax perspective for US expats living in the UK?

Aside from the general exchange gain or loss implications for US citizens transacting in non-US currency, the weaker British pound actually provides an important opportunity for US expats who have investments treated as passive foreign investment companies (PFICs) for US tax purposes.

PFICs - an overview

The PFIC rules, while complex, are important to understand because they affect many UK investments made by expats after moving abroad, both from a tax and reporting perspective. 

Unbeknown to many expats, most foreign mutual funds, for instance, fall within the definition of a PFIC.

This can be the case even if such funds are held through a tax-deferred savings account (for instance, UK ISAs) or a UK pension that is not covered by the US-UK tax treaty.

Technically, a PFIC is a foreign corporation that has one of the following attributes:

• At least 75% of its income is considered "passive" (e.g., interest, dividends, royalties), or

• At least 50% of its assets are passive-income producing assets. 

A US person that holds any interest in a PFIC, directly or indirectly, is subject to the PFIC rules.

Under the PFIC default rules under Section 1291 of the Internal Revenue Code, investment income resulting from certain distributions from a PFIC or gain from the sale of a PFIC interest is generally subject to highly punitive US federal tax rates, namely the highest marginal tax rate that can be imposed on an individual taxpayer (regardless of whether capital gains tax rates would normally apply). 

A significant (and non-deductible) penalty interest charge, which compounds regularly while holding an interest in a PFIC, is also triggered upon certain distributions from a PFIC or gain from the sale of a PFIC interest.

More on Investment

Partner Insight: Why choose semi-liquid funds for investing in renewable infrastructure?

Partner Insight: Why choose semi-liquid funds for investing in renewable infrastructure?

There are more opportunities for private investors to access renewable energy investments today. Schroders' Jack Wasserman and Duncan Hale look at how semi-liquid funds fit the bill

Jack Wasserman, Private Markets Group and Duncan Hale, Lead Portfolio Manager at Schroders
clock 26 November 2024 • 4 min read
JPMAM's Karen Ward: Political uncertainty in markets has been replaced with 'policy uncertainty'

JPMAM's Karen Ward: Political uncertainty in markets has been replaced with 'policy uncertainty'

Same number of unknowns in 2025

Eve Maddock-Jones
clock 22 November 2024 • 4 min read
Stories of the Week: Fund groups record weaker net sales; ISA reform 'under review'; Ballie Gifford withdraws from climate initiatives

stories-fund-record-weaker-net-retail-sales-isa-reform-review-ballie-gifford-withdraws-climate-initiatives

Funds, ISAs and climate initiatives: The biggest stories from the world of investment and asset management this week

clock 22 November 2024 • 1 min read
Trustpilot